NOTE 8 – CONVERTIBLE NOTES PAYABLE

 

The Company issued convertible notes payable. The outstanding balance and any accrued interest is due on maturity date or when the cash is available to repay the notes payable. Under the agreement, the notes can be convertible at the holder’s discretion into common shares of the Company’s stock at a 25% discount to the price at the date of exercise.

 

The Company’s convertible notes payable is as follows:

 

Convertible Note		Issuance Date		Maturity Date		Interest  Rate				Original Borrowing				Balance at March 31, 2016				Balance at December 31, 2015
Note 1		October 2, 2014		December 31, 2015			5.0	%		$	100,000			$	100,000			$	100,000
Note 2		December 23, 2015		September 23, 2016			8.0	%		$	21,000			$	21,000			$	21,000
Total															121,000				121,000
Debt Discount															(1,983	)			(9,333	)
Net balance															119,017			$	111,667

 

The Company adopted the provisions of FASB ASC Topic 815, “Derivatives and Hedging” (“ASC 815”) (previously EITF 07-5, “Determining Whether an Instrument (or an Embedded Feature) is Indexed to an Entity’s Own Stock”), as the convertible note agreement contained certain provision that the convertible note failed to pass the “fixed for fixed” criteria of ASC815, the conversion feature of the convertible debt should have to be bifurcated and recorded separately until the conversion date.

 

Based on ASC 815, the Company determined that the convertible debt contained embedded derivatives and full-ratchet provision which the Company valued the embedded derivative using the Black-Scholes method. The following table represents fair value of embedded derivative movement from the date of issuance to March 31, 2016:

 

Embedded Derivative Liabilities		Fair Value at Date of Issuance				Changes in Fair Value				Fair Value at March 31, 2016
Note 1 – Issued in 2014		$	70,334			$	(31,815	)		$	38,519
Note 2 – Issued in 2015		$	20,000			$	(20,000	)		$	-
Note 3 – Issued in 2015		$	10,500			$	219,800			$	230,300
Total						$	167,985			$	268,819

 

As a result of initial recording of derivative liability of $30,500 for convertible notes issued in 2015 with proceeds of $49,000 the Company recorded debt discount of $30,500 at the date of issuance of convertible note payable for issuances occurred in 2015. The Company accretes debt discount of $30,500 for convertible notes issued in 2015 and $70,334 for convertible note issued in 2014 over the life of the convertible note. The Company recorded accretion of $7,350 and $0 for the three months ended on March 31, 2016 and 2015 which is recorded as interest expense.

 

The following table represents fair value of embedded derivative movement from the date of issuance to December 31, 2015:

 

Embedded Derivative Liabilities		Fair Value at Date of Issuance				Changes in Fair Value				Fair Value at March 31, 2016
Note 1 – Issued in 2014		$	70,334			$	5,856			$	76,190
Note 2 – Issued in 2015		$	20,000			$	(20,000	)		$	-
Note 3 – Issued in 2015		$	10,500			$	21,000			$	31,500
Total						$	6,856			$	107,690

  

As a result of initial recording of derivative liability of $30,500 for convertible notes issued in 2015 with proceeds of $49,000 the Company recorded debt discount of $30,500 at the date of issuance of convertible note payable for issuances occurred in 2015. The Company accretes debt discount of $30,500 for convertible notes issued in 2015 and $70,334 for convertible note issued in 2014 over the life of the convertible note.

 

Interest incurred for the three months ended on March 31, 2016 and 2015 was $0 and $1,251 (excluding debt discount accretion of $17,583 which is also recorded as interest expense).